Why Banks Pay Almost No Interest

How It Works

The interest rate a bank pays on deposits is fundamentally a competitive decision. When consumers have nowhere else to put liquid savings — when money market funds are paying nothing and Treasury yields are near zero — banks face no competitive pressure to raise deposit rates. They can pay 0.01% and customers stay because the friction of switching is higher than the reward.

Legacy banks have very high fixed costs. A major bank with thousands of branches, tens of thousands of employees, a multi-decade-old mainframe computer infrastructure, a large compliance department, and executive compensation packages requires enormous revenue just to break even. The only way to fund these costs is to maintain a wide net interest margin — keeping deposit rates low and loan rates high.

Historically, consumers kept money at banks because banks offered liquidity (instant cash access), safety (FDIC insurance), and services (payments, mortgages, etc.) that no alternative could match. The low interest rate was the price of those services. But digital technology has disaggregated those services: online brokerage accounts offer liquidity, Treasury bonds offer safety, and payment apps handle transfers without requiring a bank account at all.

When the Federal Reserve raised interest rates to 5%+ in 2022-2023, Treasury bills and money market funds immediately began paying 4 to 5%. Banks were slow to pass this on to depositors — some of the largest banks continued paying 0.01 to 0.5% on checking accounts even as their own borrowing and lending rates surged. This asymmetry, which captured enormous profit for banks, finally became visible to consumers and accelerated deposit migration.

Why It Matters

For decades, the lack of consumer alternatives for liquid savings has enabled banks to quietly capture trillions of dollars in wealth that could have gone to depositors. The aggregate difference between what American banks pay on deposits and what those same banks earn on assets represents hundreds of billions of dollars annually — effectively a hidden tax on anyone who keeps their cash in a bank account.

The new financial system threatens this arrangement. Yield-bearing stablecoins, high-yield savings accounts at fintech companies, direct Treasury bill purchases through TreasuryDirect.gov, and money market funds all offer consumers better alternatives. As these alternatives become more accessible — particularly if stablecoin yield becomes legal and easy to access — the era of near-zero deposit rates may be ending whether banks like it or not.

Real-World Example

In June 2023, the Federal Reserve's benchmark rate was 5.25%. JPMorgan Chase — the largest US bank — was paying 0.01% on basic savings accounts. A six-month Treasury bill purchased directly through TreasuryDirect.gov was paying 5.2%. A consumer with $20,000 in a Chase savings account earned $2 that year. The same $20,000 in a Treasury bill earned approximately $1,040. The bank captured the $1,038 difference.